For beginners coming to investing, picking the right shares can seem like the most difficult part. Various experts will all advocate their specific preferences. The truth is that a good approach should encompass many components. Here are my personal two best strategies for investing in the stock market.
Invest for long-term growth
All of the best strategies for investing in the stock market should be considered over a period of at least five years. There are certainly shares you can make money out of over a short time if you know what you are doing, but it is riskier and usually requires more initial capital.
Picking shares for the long term allows you to look at a company’s fundamentals. Though we all wish share prices were driven only by the true strength or weakness of a company, in the short run this is rarely true. Expectations often drive prices.
In the long run however, these fluctuations even out so to speak. A company’s true strength should prevail. Read news articles and commentary and don’t be afraid of your own opinions. Have you noticed a new trend? Have your shopping habits changed? Perhaps there are shares worth looking at there.
Personally I usually take a ‘top down’ approach. First I consider the industry itself. Even the best company in a dying industry will struggle over the next few years. Similarly, a mediocre choice in a booming sector will probably see its share price grow.
Only after I am happy with the industry, do I consider individual stocks. I look for consistent revenue and profit growth. I think low debt is usually a good thing, though this can be very dependent on the industry. I also have a personal preference for firms paying dividends, which takes me to my second strategy…
Investing for income
I consider investing for income one of the best strategies for investing in the stock market for a number of reasons. Firstly, it is quite transparent. Whereas growth for a share price is an unknown, its next dividend payment is far more certain.
That is not to say dividends do not change or get cancelled, but if an income share is picked well, the risk of this should be minimised. Finding a share’s current dividend is usually very easy. Likewise filtering for the best returns across shares can be done quickly, though there is more to the choice than just yield.
Dividend investing also allows for cumulative interest. Reinvesting dividends in dividend paying shares means that the initial payments themselves earn money. Next time, those payments earn money as well. This is the nature of cumulative interest.
If income is your main goal, I look for less risky shares. This means big blue-chip companies like those in the FTSE 100. Again use some of the same criteria as for growth. I wouldn’t want a dividend share in a dying industry.
I also look for a consistent history of payouts from the company. Preferably, the firm will have steadily increased its dividend payments over the past five years as well.
The truth is, for me these two strategies for investing in the stock market usually come together. I look for dividends in my growth shares, and I want growth in my income stocks.